Ten giveaways to capitalise on before the end of the tax year – if you're quick
The tax year closes in April every year, and with that ends the opportunity to make the most of your tax-free allowances.
Here, Telegraph Money details 10 tasks that will ensure you make the most of your annual tax breaks.
1. Use your Isa allowance
Individual Savings Accounts (Isas) offer one of the most tax-efficient ways to save and invest.
There is no tax charged on any investment growth or interest earned within the savings vehicle and every individual can save up to £20,000 each year.
Colin Dyer, of investment company abrdn, said: “They really are a case of ‘use it, or lose it’. Your Isa allowance refreshes every tax year – and you can’t roll over unused amounts.”
There are several types of Isa and you can open one of each if it suits your savings goals, as long as you spread the £20,000 allowance across them.
A Cash Isa is best for short-term saving, whereas a Stocks & Shares Isa should be for longer term goals. A Lifetime Isa, meanwhile, can help you save for your first home or for retirement.
Just remember you cannot open or pay into two of any one type of Isa in the same tax year.
2. Pay into your pension
Another highly tax-efficient way to save for the future is through your pension. Pension contributions provide income tax relief at whatever the taxpayer’s marginal rate is, so a 40 per cent taxpayer will only pay a net cost of £6,000 for a £10,000 gross contribution.
“The way tax relief is given depends on the type of pension scheme you’re in and how you make payments,” Mr Dyer said.
“In a lot of workplace schemes, your employer deducts your pension contributions from your salary before tax is collected. So there’s no need for you to claim tax relief yourself. But in other schemes you may need to claim the tax relief from HM Revenue and Customs.”
The annual allowance limits how much you can contribute into your pension each year tax-free. This is capped at £40,000 for 2022-23. Next year the annual allowance will go up to £60,000, as announced in the Spring Budget.
Technically you may be able to put away £120,000 this year by using “carry forward”. Under carry-forward rules, you can use unused allowances from the three previous tax years.
Contributing to your pension is especially important for those earning over £100,000. If you earn between £100,000 and £125,140, then your personal allowance is lost at a rate of £1 for every £2 earned over the threshold – resulting in a 60 per cent tax rate.
When the additional rate threshold drops next month, then anyone earning over £125,140 is charged 45 per cent tax.
For these taxpayers, contributing to your pension can help you drop a tax band, saving your wealth from April’s tax rise.
3. Be savvy with your bonus
Anyone at risk of falling into the 45 per cent tax bracket in April may want to think about rescheduling bonus payments that could push them over the £125,140 threshold, or redirecting them into their pension.
4. Use your capital gains tax allowance while you still can
Capital gains tax (CGT) is due on the profits you make when you sell an asset such as a second property or an investment portfolio.
Higher and additional rate taxpayers are charged 28 per cent for property and 20 per cent for other assets. It is 18pc and 10pc for basic rate taxpayers.
On April 6, the annual allowance will be slashed from £12,300 to just £6,000. So if you have assets that could trigger a capital gains, you want to think about selling them this tax year to take advantage of the higher allowance. It will drop again to £3,000 next year.
5. And don’t forget your dividend tax allowance
Along with the CGT allowance, the dividend allowance is dropping from £2,000 to £1,000 in April, and then to £500 next year.
Some investors earn dividends from their investments, while small business owners sometimes pay themselves in dividends.
The self-employed may want to think about taking their dividends before the allowance is cut in order to reduce their tax bill.
6. Make use of spouse’s allowances
If your spouse is in a lower tax bracket, then make the most of their allowances.
Basic rate taxpayers can earn up to £1,000 in savings interest before having to pay tax at their rate of income tax, whereas additional rate taxpayers get no personal savings allowance.
Non-taxpayers get a £5,000 allowance. It may make sense to hold savings in the name of the spouse in the lower tax band to keep more of the interest you earn.
Dividend tax and capital gains tax rates are also lower for basic rate taxpayers – so consider transferring income-generating assets such as property and shares into your spouse’s name.
7. Gifting allowance for inheritance tax
To reduce the size of your estate – and therefore potentially slash your IHT bill – use up your gift allowances.
Everyone gets an annual exemption of £3,000 per year. You can also give away small gifts of up to £250 per person – though not to anyone who has already benefited from your £3,000 exemption.
For weddings, you get an extra allowance. You can give away £5,000 to a child or grandchild who is getting married, £2,500 to the person you are marrying and £1,000 to any other person.
8. Consider VCTs
Higher earners who have already used up their Isa allowances and pension contributions may want to think about using higher risk investments to reduce their tax bills.
There is 30 per cent income tax relief on up to £200,000 of investment in a venture capital trust (VCT). This means that if you invest £20,000 in a VCT, you will receive a tax relief of £6,000. However, you have to hold the investment for at least five years or you will have to pay the tax relief back.
9. Don’t forget the marriage allowance
Ben Yearsley of financial advice firm Shore Financial Planning said: “The Marriage Allowance lets you transfer £1,260 of your personal allowance to your husband, wife or civil partner.
“It only works when one is a non-taxpayer – the receiving partner needs to be a basic rate taxpayer. It could save £252 this tax year.”
10. Or your childrens’ savings
Children also get their own tax-efficient savings allowances. Make use of the Junior Isa allowance of £9,000 and the pension allowance of £2,880 before April 5.
Emma Watson, of private bank Rathbones, said: “Setting up a Junior Isa is one way to give your child a financial boost once they turn 18. Parents or guardians can set up a Jisa on their child’s behalf, and anyone may pay into it.”